1. 1 Cost-benefit analysis & the numbers game Premised on assumption of objectivity Premised on assumption of objectivity Numbers are meant to rule out value, opinion, bias Numbers are meant to rule out value, opinion, bias Powerful tools in government and business for justifying actions Powerful tools in government and business for justifying actions Absolve political actors from responsibility Absolve political actors from responsibility

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3. 3 Since Reagan, the basis for most political actions Most policies are not allowed without a cost-benefit analysis Most policies are not allowed without a cost-benefit analysis Several versions of the term Several versions of the term Stone’s version is simplistic Stone’s version is simplistic Add up positive policy outcomes on one side… Add up positive policy outcomes on one side… …add negative outcomes on the other …add negative outcomes on the other Hope that overall they are positive Hope that overall they are positive

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5. 5 We then assign dollar values Costs: Costs: Equipment Equipment $60,000 $60,000 Communications Communications $20,000 $20,000 Project development Project development $75,000 $75,000 Total costs: Total costs: $155,000 $155,000 Benefits: Benefits: Reduced costs: Reduced costs: $50,000 Time saved Time saved $70,000 Reduced operating cost Reduced operating cost $60,000 Total benefits: Total benefits: $180,000

6. 6 Then divide benefits by costs Divide $180,000 by $155,000 Divide $180,000 by $155,000 The resulting ratio is 1.16 The resulting ratio is 1.16 Any ratio above 1 is positive Any ratio above 1 is positive This means that the benefits outweigh the costs This means that the benefits outweigh the costs

7. 7 Risk-benefit analysis More complicated, more official More complicated, more official Takes into account not only possible outcomes, but their likelihood for occurring Takes into account not only possible outcomes, but their likelihood for occurring Same first steps as before Same first steps as before Collect possible outcomes Collect possible outcomes Assign dollar values to them Assign dollar values to them But then… But then…

8. 8 Determine risk of event, positive or negative Multiply assigned dollar value by percentage risk Multiply assigned dollar value by percentage risk For example… For example… 80% chance of earning $1000… 80% chance of earning $1000… …this equals a net equivalent value of $800 …this equals a net equivalent value of $800 Then tally all negatives and positives Then tally all negatives and positives This method produces far different results This method produces far different results Even if there is only a 1% chance of an earthquake causing $5 billion damage… Even if there is only a 1% chance of an earthquake causing $5 billion damage… …still large net value …still large net value

9. 9 CBAs can be manipulated Many predictions are merely guesses Many predictions are merely guesses How accurately can one predict an earthquake AND the damage it causes? How accurately can one predict an earthquake AND the damage it causes? Another problem is known as discounting Another problem is known as discounting Discounting: the rate at which we value future events or commodities Discounting: the rate at which we value future events or commodities Expressed as a percentage rate (eg., 5% discount rate) Expressed as a percentage rate (eg., 5% discount rate) A policy worth $20 billion 2 years from now is more valuable than one 30 years from now A policy worth $20 billion 2 years from now is more valuable than one 30 years from now

10. 10 Numbers are not representative of solid categories

11. 11 Danger of political polls VERY difficult to do a poll well VERY difficult to do a poll well Yet Americans have almost mystical faith in them Yet Americans have almost mystical faith in them Americans poll everything Americans poll everything Yet often do not question objectivity Yet often do not question objectivity

12. 12 Hiding politics in numbers (budgets) Things are rarely what they seem… Things are rarely what they seem… … budgeting accounts are complex and intricate- it is often possible to hide money, or the lack of it … budgeting accounts are complex and intricate- it is often possible to hide money, or the lack of it

13. 13 Many assumptions behind economic models For example, unemployment statistics do not report: For example, unemployment statistics do not report: Underemployed Underemployed Imprisoned Imprisoned Out of work who do not collect benefits Out of work who do not collect benefits Government budgets do not reflect how much money there really is. Government budgets do not reflect how much money there really is.

14. 14 “Pay-as-you-go” Budgets do not work like checkbooks… Budgets do not work like checkbooks… …they are more like check-cashing outfits …they are more like check-cashing outfits A budget is simply a set of authorizations for a government to collect and spend money A budget is simply a set of authorizations for a government to collect and spend money -But the money is not there yet. -But the money is not there yet. A government spends money on the expectation that it will have enough at the end of the year A government spends money on the expectation that it will have enough at the end of the year But that assumes... But that assumes... …that projections were correct …that projections were correct

15. 15 All agencies use different budgets Dept. of Fish General Revenue $10 million 100 employees License Fees (Program Rev.) $110 million Programs and grants Special Purpose Rev. $15 million Special one- time programs

16. 16 In budget cuts, only General Revenue counts Dept. of Fish General Revenue $10 million 100 employees License Fees (Program Rev.) $110 million Programs and grants Special Purpose Rev. $15 million Special one- time programs

17. 17 What if the funding were different? Dept. of Fish General Revenue $1 million 10 employees License Fees (Program Rev.) $119 million 90 employees Programs and grants Special Purpose Rev. $15 million Special one-time programs

18. 18 Or, if the agency really had to cut money, it could cut special purpose revenue Dept. of Fish General Revenue $10 million 100 employees License Fees (Program Rev.) $110 million Programs and grants Special Purpose Rev. $15 million Special one- time programs

19. 19 But special budgets are special because… They only exist for one year They only exist for one year Tobacco settlement money is an example Tobacco settlement money is an example Suppose the state has a budget of $40 billion… Suppose the state has a budget of $40 billion… …and tax receipts of only $35 billion… …and tax receipts of only $35 billion… …and receives $5b for tobacco. …and receives $5b for tobacco. That means the budget will appear balanced for one year… That means the budget will appear balanced for one year… …but after that, it will be short $5 billion …but after that, it will be short $5 billion Made worse if funds are transferred from inside existing government budgets Made worse if funds are transferred from inside existing government budgets

20. 20 Suppose legislature takes $10 million out of general revenue for debts… Dept. of Fish General Revenue $10 million 100 employees License Fees (Program Rev.) $110 million Programs and grants Special Purpose Rev. $15 million Special one- time programs Funds will come out of General Revenue… and will be replaced by $10 million from Special Purpose funds… Officially, the agency will still have $135 million- but practically it will only have $125 million, and an extra (above the existing tax base) $10m will have to be found next year.